Bitcoin is a new digital currency using peer-to-peer technology and no central authority or banks, otherwise known as a ‘cryptocurrency’. The bitcoin is currently trading at £7579.17 to 1BTC (February 2018), following a fall from £15,000 in December 2017. As the value of the bitcoin rises and falls, many are considering the tax implications of the sale of their holdings.
The Bitcoin does not have legal tender status in any jurisdiction, however, this doesn’t mean it is exempt from tax implications. Cryptocurrencies are still relatively new and therefore evolving to determine their legal and regulatory status.
According to HMRC:
VAT Treatment for cryptocurrencies
The following are provisional VAT implications due to the evolutionary nature of the bitcoin and are pending further developments. However, please note that in all instances, VAT will be due from the suppliers of any goods or services that are sold in exchange for a cryptocurrency. The value on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.
Until HMRC announce further changes, for VAT purposes Bitcoin will be treated as follows:
- income received from Bitcoin mining activities will generally be outside the scope of VAT
- income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT
- when Bitcoin is exchanged for Sterling or for foreign currencies, no VAT will be due on the value of the Bitcoins themselves
- charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT
Corporation Tax, Income Tax and Capital Gains Tax Treatment for cryptocurrencies
Activities involving Bitcoin and other similar cryptocurrencies will be subject to Corporation Tax, Income Tax or Capital Gains Tax depending on the activities and the parties involved.
Determining whether any gain is chargeable, or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts.
For businesses which accept payment for goods or services in Bitcoin there is no change to when revenue is recognised or how taxable profits are calculated.
- The profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply. For companies, exchange movements are determined between the company’s functional currency (usually the currency in which the accounts are prepared) and the other currency in question. If there is an exchange rate between Bitcoin and the functional currency, then this analysis applies. Therefore, no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under normal Corporation Tax rules.
- The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal Income Tax rules.
Chargeable Gains: Corporation Tax and Capital Gains Tax
- Gains and losses incurred on cryptocurrencies, including Bitcoin, are chargeable or allowable for Capital Gains Tax if they accrue to an individual or, for Corporation Tax on chargeable gains if they accrue to a company.
If you have any further questions regarding cryptocurrencies, including Bitcoin, do not hesitate to contact us so we can advise you of the best course of action.